There is no doubt that at times like today, portfolio diversification is essential. Market participants have been panic sellers. Today the rand fell massively as waves of selling hit both equities and the currency – presumably mostly foreign.
Markets have seen panic selling in the past – yes there are always very good reasons at the time, but at the extreme, its largely psychological or investor behaviour that drives price down.
When investors sell Anglos down 11,3%, Northam down 21%, Arcelor Mittal down a massive 26%, Sasol down 9,5% and Metorex down 24% in one day, there is no consideration to the profitability outlook of these companies by the owners.
Its simply weak shareholders very quickly morphing into panicky sellers. With no buyers around, the weak sellers have no option but to accept much lower prices.
The sellers scream to the stockbrokers – Get me out at any price!!!. I need the cash now back in my bank account. I don’t care what price I get.”
Selling leads to more panic selling.
The general concern has led to fear, the fear to panic and rather soon despair is going to set in. Invariably this marks the bottom of the market.
The rand weakened to almost R9/USD. Now at R8,85. At the beginning of the year it was R7. The last time, the rand was at this level was back in 2002.
So how should long term investors assess the current market
We may not have seen the bottom of this market, and it may be a few years yet before things look “normal” again, but a long term investor in a business will look for cash flow generation – both now and into the future.
Some investors look at buying a company now that will in say 3- 5 years provide a 10% dividend income on the original capital invested.
They therefore seek out companies at prices that have a high probability of providing this level of income stream,
It may be a simplistic way to approach investing, but its an approach used by a successful investment manager, and in my view contains 2 important elements.
o A focus on the current valuation when buying, which is critical for long term superior performance.o A focus on the income generated from an investment.
A company priced on a 1,5% dividend yield, requires a 46% per annum increase in its dividend per annum over 5 years to reach 10%. It appears expensive and the probability of receiving a 10% yield in 5 years time is very low.
However a company priced on a 5,5% dividend yield only requires a 12,7% per annum increase over 5 years for the dividend yield to run at 10% of original cost. A far better prospect.
An investor receiving 10% tax free yield on his initial outlay 5 years ago, is far less concerned about daily and monthly price volatility
At some point in time, excellent value plus a shakeout of most of the weaker sellers will provide an underpin to prices. But we are not quite there yet.
Regards
